With 2024 a mere nine weeks away, now's the time to cross any remaining tasks off your to-do list for this year. The holidays are looming but so are the deadlines to make key retirement moves. For workers, the deadline for this year's 401(k) contributions is Dec. 31, 2023. And for some seniors, that date also marks their last opportunity to avoid a huge tax penalty. Here's what you need to know.
How much have you withdrawn from retirement savings this year?
Tax-deferred retirement accounts like traditional IRAs and 401(k)s give you upfront tax savings. Money you put here reduces your taxable income for the year, and you don't pay taxes on your earnings while the money remains in the account. But eventually, you have to give Uncle Sam its cut.
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The government ensures this by requiring all seniors 73 and older to take annual required minimum distributions (RMDs). These are minimum withdrawals you must make from your retirement accounts based on your account balance and your age. We'll look at how they're calculated in more detail below.
The only accounts you don't have to take RMDs from are Roth IRAs and your current workplace retirement plan, if you're still employed. In the latter case, RMDs for that account begin in the year you retire. It's also worth mentioning that starting in 2024, you won't have to take RMDs from Roth 401(k)s either.
If you turned 73 in 2023, you actually have until April 1, 2024, to take your first RMD. But anyone older than this must have their RMD by Dec. 31, 2023, if they hope to avoid the 25% penalty the government charges seniors who skip them.
How much do you have to withdraw from your savings for your RMDs?
Determining your RMD requires a little math, but it's nothing too complicated. If you have a 401(k), your plan administrator should do the work for you. But if you have an IRA, you'll need to calculate the annual RMD on your own, unless your plan administrator has tools to help you with this. Here are the basic steps.
First, you need to figure out what your account balance was at the end of the previous year. If you're trying to calculate your RMD for 2023, you'd look at the balance at the end of 2022. Check with your plan administrator if you're not sure how much you had in your account at that time.
Then, you take that balance and divide it by the distribution period for your age listed in the Uniform Life Expectancy table. The result is your RMD for the year from that account. For example, if you had $50,000 in a traditional IRA at the end of last year and you're 75, you'd divide the $50,000 by the 24.6 distribution period for 75-year-olds to get an RMD of about $2,033.
If you've already withdrawn at least that much from your IRA, you've taken your RMD for the year. You're not legally required to withdraw more from this account, though you may do so if you want to. But if you haven't withdrawn enough during 2023, make sure you do so before the end of the year.
Repeat the steps above for all your retirement accounts except Roth IRAs and your current workplace retirement plan. One thing to note if you have multiple IRAs: You must calculate your RMD for each IRA separately, but you can withdraw all the money from a single account if you choose.
For example, let's say you have two traditional IRAs and you have to take a $1,000 RMD from one and a $2,000 RMD from the other. You could choose to take $1,000 from the first account and $2,000 from the second. Or you could take $3,000 from either one. As long as you're withdrawing enough from your IRAs to cover all your IRA RMDs, it doesn't matter how much comes out of which account.
What if you don't need the money?
You may not want to withdraw money for RMDs if you don't have a use for it. After all, the withdrawal will just raise your tax bill. But there are ways you can minimize this and keep your money growing if you prefer.
Donating your RMD to a charity can earn you a tax deduction that will offset the extra you'd owe. You could also reinvest the money in a taxable brokerage account or just keep it in a bank account if you think you'll use it in the near future.
If you're worried about forgetting RMDs, see if your account provider enables you to set up automatic distributions so you don't have to take them manually. You may be able to do this through your online account, but if you have any questions, don't hesitate to reach out to your plan administrator.
